Outlook: HSBC gambles on Household 'assets' not being a liability

A great deal at a bargain basement price, or an accident waiting to happen? HSBC's $13bn acquisition of Household can reasonably be seen in both lights. Household is a highly profitable and fast growing enterprise whose shares have been walloped by mounting concern over sharp selling practices and the weakened state of the US economy. By buying it, HSBC gains critical mass in an area of the world where its presence is still quite limited.

As a global bank, HSBC reckons it needs to be big in the US. Sir John Bond, HSBC's chairman, thinks Household, with its 50 million customers, the perfect fit. HSBC's strong deposit base seems to provide the perfect counter balance to Household's strengths in US consumer lending. There is a consequent huge potential, he insists, for cutting Household's cost of funding and for general business and technological cross fertilisation.

Convinced? No, thought not, for although HSBC's rhetoric is long on vision, it is a little short on reassuring detail. So how much might these lower funding costs be worth to Household? Not saying, Sir John responds. And what might the business synergies be worth. Again not saying.

Citigroup, seen by HSBC as its main global competition, bought a similar "sub-prime" consumer credit business, Associates First, in late 2000, but in that case there were big cost benefits to be had, since Citigroup was already big in consumer credit. No such cost cutting potential exists with Household. Furthermore, there is a sizeable list of negatives.

Chief among these is the possibility of very substantial further penalties for "predatory lending". Household lends to the poorer elements of society. "Sub-prime lending" is the polite term for what others would call loan shark business. Household insists that it has cleaned up its act since settling with regulators in more than 40 states by paying a $484m fine. But there is no guarantee that this is where the financial pain ends and the company still faces a mass of civil litigation for alleged sharp practice.

The other major risk is the US economy. This is being kept afloat on a sea of consumer credit, much of it provided by the likes of Household. As the economy slows, it seems inevitable that bad debt experience will climb, this at a time when growth in the market for consumer credit will very likely be grinding to a halt. HSBC is confident that sub-prime will remain high growth, and that measures taken over the last two years to improve levels of loan security will keep the lid on bad debt experience. Maybe, but Household's willingness to sell with its shares at a seven year low might suggest otherwise. For Household, HSBC's strong balance sheet provides just the sort of shelter it will need if the going gets tough. Household could end up more of a liability for HSBC than the asset it imagines.

The Royal Mail

There was carrot and stick yesterday from Allan Leighton, chairman of Royal Mail. The carrot is the promise of an £800 dividend payment for every postie if the organisation achieves its financial recovery. The stick is the threat of loan default and receivership unless the postal regulator agrees to go easy on prices.

The phantom share certificates are already in the post to 200,000 employees. Mr Leighton is, meanwhile, waving his stick in threatening fashion in the direction of the Postcomm chairman Graham Corbett. Mr Leighton says he insisted on the default clause being inserted into Royal Mail's £3bn loan agreement with the Government. And you can see why ministers were only too happy to oblige.

The Government cannot be seen publicly applying pressure on its own independent regulator to cut Royal Mail some slack. So what better tactic than to hide behind the covenants attached to Royal Mail's financing arrangements with the National Loan Fund? One of the covenants says that unless Royal Mail is happy with the final price proposals from Postcomm, then it will not be allowed to draw on the £3bn.

Mr Leighton thought he had a deal with the regulator – a 1p rise in prices which would add £500m to revenues. But running a regulated monopoly is not like being in charge at Asda. When he saw the fine detail, the £500m increase had turned into a £500m cut in income, putting Royal Mail's survival plan in the shredder.

If the regulator refuses to back down, Mr Leighton has three courses of action. He can appeal to the Competition Commission. If that fails can seek a judicial review. And if that fails as well he can apply for administration. No government-owned organisation has suffered this fate before, so Royal Mail would be in uncharted territory. In the event of an administration, it seems likely that only the rural network and the universal service obligation – the requirement to deliver to every address in Britain at a uniform price – would be guaranteed to survive. That would really test the private sector's ability to deliver an alternative postal service. Mr Leighton is betting it won't come to that.

Guinness four

It is coming up for 16 years since Department of Trade and Industry inspectors were appointed to investigate the affairs of Guinness, thereby exposing one of the biggest corporate scandals of the post war period, but still legal proceedings associated with the case drag on. Yesterday, the four men convicted of the Guinness shares fraud – Ernest Saunders, Gerald Ronson, Jack Lyons and Tony Parnes – had what appears to be their last avenue of appeal rejected by the House of Lords.

So does this finally mark the end of the Guinness affair. Well, perhaps not quite. The four now plan to return to Europe, where the principle that they received an unfair trial because they were deprived of their right of silence has already been recognised. They are wasting their money. These convictions are never going to be quashed. The British judiciary would rather have us leave the European Union than accept there has been a miscarriage of justice with regard to this case.

As a younger man, I sat through the six-month Guinness trial. In the process I got to know two of the defendants quite well and was on relatively friendly terms with the other two. I wouldn't have described any of them as crooks, or even rogues. No one obviously lost money as a result of the Guinness affair, and compared with the modern scandals of Enron and WorldCom, the deceptions at the heart of it seem to pale into insignificance. Yet to my mind the convictions were fair. The Guinness scandal was a shameful episode in City history and these four were in the thick of it. It was a show trial, certainly, and the Guinness four were undoubtedly made the fall guys for what was a quite widespread collapse in standards. But nobody is arguing about whether they did it or nor, well, nobody other than Mr Saunders who to this day insists that he knew nothing about the shenanigans going on right under his nose as chief executive of Guinness. Otherwise, the basic facts are not in dispute. The quarrel is only about whether there was dishonest intent, and the fairness of the proceedings.

Gerald Ronson, now re-established as a successful property developer, and the last time I saw him looking fitter than ever, has always insisted that he would never have done it had he thought it dishonest, and I believe him. But that was never the point. Multi-million pound success fees paid through offshore tax havens and numbered Swiss bank accounts, shadowy share support operations, secret meetings, chicanery and cover up, this was not the stuff or ordinary business and the jury rightly punished them for it. I sat through that trial, and I can guarantee the jury would have reached the same verdict even without the offending DTI transcripts, or indeed Ernest's disastrous performance in the witness box. Their best policy now would be to drop the case, put it behind them and get on with their lives. But they won't. Pride can be a terrible thing, and it undoubtedly means they'll carry their grievances to their death beds.

jeremy.warner@independent.co.uk